This paper introduces an index of tax optimality that
measures the distance of some current tax structure from the optimal tax
structure in the presence of public goods. In doing so, we derive a [0, 1]
number that reveals immediately how far the current tax configuration
is from the optimal one and, thereby, the degree of efficiency of a tax
system. We call this number the Tax Optimality Index. We show how
the basic method can be altered in order to derive a revenue equivalent
uniform tax, which measures the size of the public sector. A numerical
example is used to illustrate the method developed.
JEL Code: H21, H41.
Keywords: Tax optimality index, excess burden, distance function.
Authors Affiliations: Raimondos-Møller: Copenhagen Business School, CEPR,
CESifo, and EPRU. Woodland: University of Sydney.

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This paper examines the welfare implications of non-discriminatory
tariff reforms by a subset of countries, which we term a non-preferential trading
club. We show that there exist coordinated tariff reforms, accompanied
by appropriate income transfers between the member countries, that unambiguously
increase the welfare of these countries while leaving the welfare of
non-members unaltered. In terms of economic policy implications, our results
show that there exist regional, MFN-consistent arrangements that lead
to Pareto improvements in world welfare.
JEL code: F15.
Keywords: Trading clubs, non-preferential tariff reform, Kemp-Wan-Ohyama proposition.

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This paper introduces the concept of a steepest ascent tariff reform for a small open economy. By construction, it is locally optimal in that it yields the highest gain in utility of any feasible tariff reform vector of the same length. Accordingly, it provides a convenient benchmark for the evaluation of the welfare effectiveness of other well known tariff reform rules, as e.g. the proportional and the concertina rules. We develop the properties of this tariff reform, characterize the sources of the potential welfare gains from tariff reform, use it to establish conditions under which some existing reforms are locally optimal, provide geometric illustrations and compare welfare effectiveness of reforms using numerical examples. Moreover, being a general concept, we apply it to the issue of market access and examine its implications. Overall, the paper’s contribution lies in presenting a theoretical concept where the focus is upon the size of welfare gains accruing from tariff reforms rather than simply with the direction of welfare effects that has been the concern of the
literature.
JEL code: F15.
Keywords: Steepest ascent tariff reforms; piecemeal tariff policy; welfare; market access; small open economy.